On January 18, 2007, the Fifth Circuit Court of Appeals reversed the Eastern District of Texas’ certification of a class action against Electronic Data Systems, Corp. (“EDS”) in a 401(k) employer stock ERISA litigation. Langbecker v. Electronic Data Systems Corp., 2006 WL 117465 (5th Cir. 2007). The Fifth Circuit is one of the first appellate courts on record to discuss the impact of participants’ releases, the § 404(c) defense, and other intraclass conflicts on the ability to bring ERISA fiduciary breach claims in the 401(k) employer stock context as a class action.
The claims asserted in the EDS case are fairly typical of the post-Enron employer stock claims. The plaintiffs alleged four breach of fiduciary duty claims under ERISA (prudence, monitoring, loyalty, and misrepresentation) based on a precipitous decline in the price of company stock. The plaintiffs also asserted a “rescission claim” under the securities laws based on the allegation that EDS issued unregistered stock to the 401(k) plan. The plaintiffs moved for class certification on all five counts. The putative class consisted of approximately 85,000 plan participants and beneficiaries who had EDS stock in their plan accounts between September 7, 1999, and October 9, 2002. The district court granted in part the plaintiffs’ motion for class certification, essentially certifying all of the claims except the misrepresentation claim.
Focusing on the derivative nature of a suit brought on behalf of an ERISA plan pursuant to ERISA § 502(a)(2) in which recovery directly inures to the benefit of the plan and not the individual plan participants, the district court rejected many of the defendants’ contentions that certain intraclass conflicts and fact-specific defenses defeated the typicality and adequacy elements of the Rule 23(a) analysis as to the prudence, monitoring, and loyalty claims. (Numerosity and commonality were not in dispute.) The court found all requirements of Rule 23(a) to be satisfied. The court went on to find that the prudence, monitoring, and loyalty claims “qualify for certification under both Rule 23(b)(1)(A) and (B) . . . [and] under Rule 23(b)(2).”
The district court refused to certify the misrepresentation claim, finding that the analysis as to materiality and reliance on the alleged misrepresentations would occur on an individual-participant rather than plan-wide basis. Such individual issues took these claims outside the confines of Rule 23(b)(1) and (2), and further prevented certification under the predominance requirement of Rule 23(b)(3).
The Fifth Circuit’s Decision
The Fifth Circuit rejected most of the district court’s analysis out of hand, finding that “[t]he district court erroneously interpreted the impact, inter alia, of intraclass conflicts and fact-specific defenses arising from ERISA § 404(c) and individual releases.”
As to the releases, the circuit court emphasized “that the status of perhaps nine thousand claimants is not a trifle,” and held that refusing to consider the releases was in error. The circuit court specifically stated it was not holding that the existence of the releases foreclosed class certification, and hinted that the “holders of releases could become a subclass if a class action is otherwise deemed appropriate” and if plaintiffs found a releasee who could serve as a class representative.
With regard to the § 404(c) defense, the Fifth Circuit found that it “must . . . be considered in its relation to the causes of action for recovery on behalf of a plan as a whole.” The circuit court rejected the Department of Labor’s interpretation of the § 404(c) defense, namely that § 404(c) provides no protection from claims based on imprudent selection or retention of plan investment options, as an unreasonable interpretation of the statute. The circuit court found that the scope of the defense has to be “determin[ed] on a transactional, case-by-case basis” because:
The Plan ‘as a whole’ is not entitled to recover money damages for breach [sic] where an individual participant, suing on his own behalf, could not recover. . . . [Section] 404(c) recognizes that participants are not helpless victims of every error . . . which is another way of saying that in participant-directed plans, the plan sponsor cannot be a guarantor of outcomes for participants.
Because the court held that this defense must be decided on an individual basis, it likewise required consideration by the district court for purposes of class certification.
As to the “substantial” intraclass conflicts, the circuit court noted the district court “too easily succumbed to [the plaintiffs’] minimization of the intraclass problems in this case.” The circuit court stated that “[a] few class members cannot hijack litigation ‘on behalf of the plan’ to pursue their preference at the expense of others who are not given notice of this purported representation.” The circuit court noted that there were fundamental conflicts among the class members due to: individual choices to continue to invest in company stock after disclosure of short-term financial problems; the fact that plaintiffs are seeking an injunction to remove company stock as an investment option; and the fact that there are differences between potential class members as to who made or lost money in the stock dependent almost entirely on what dates are used for the class period. Finding that these “conflicts have implications not only for dividing the pie at recovery but also for discovery and preparation for trial,” the circuit court suggested that these intraclass conflicts would likely negate adequacy under Rule 23(a)(4), but left it to the district court to reconsider on remand.
As to the Rule 23(b) analysis, the court rejected as “unsuited” and “conceptually unclear” the remedies available under Rule 23(b)(1) and (b)(2). With regard to Rule 23(b)(1), the circuit court again noted the intraclass conflicts and the monetary-relief focus of the claims, and reversed the district court’s “cursory . . . analysis” with guidance on what to reconsider on remand. The Fifth Circuit essentially held that a Rule 23(b)(2) certification would probably be inappropriate because the plaintiffs were not seeking “predominantly equitable remedies” and because of the “subtlety of the fiduciary claims alleged, the intraclass conflicts and the individualized nature of potential defenses.”
Without completely foreclosing the possibility that the district court could properly certify a class on remand, the Fifth Circuit specifically noted (and maybe even hinted) it had “recently upheld Rule 23(b)(3) class certification in [the] consolidated securities fraud suit brought against EDS concerning the same events and alleging that the Defendants’ actions concealed accounting problems and improperly inflated the value of EDS stock.” In fact, the circuit court’s main concern with the Rule 23(b)(1) and (2) options seemed to be the lack of notice and the inability to opt-out: “What seems fairly clear is that depriving tens of thousands of EDS shareholders of notice and opt-out protections, where there are undeniable intraclass conflicts pertinent to significant monetary outcomes, would create an unacceptable risk of unfair treatment of class members.”
The dissent essentially agreed with the district court’s analysis on every issue and specifically noted having “difficulty seeing how [the majority’s decision] leaves the district court any room for certification on remand.”
Based on a two to one vote, the Fifth Circuit panel reversed and remanded to the district court to “reconsider its class certification pursuant to the standards discussed herein.”
Implications for Future Class Certification Decisions
Several district courts have recently grappled with issues similar to the ones before the Fifth Circuit in Langbecker, and some have also determined certification to be inappropriate, at least in part. As the first circuit court to address these issues, the Fifth Circuit’s decision is of notable consequence and it provides defendants with authority to support their effort in defending against class certification. Given the importance of the issues and the forcefulness of the dissent, however, this decision may be headed for further review by an en banc Fifth Circuit.